After Paysafe (NYSE:PSFE) stock tumbled recently due to the company’s slightly weaker-than-expected third-quarter results and guidance reduction, PSFE stock remains a great pick for some investors. Unjustified worries about the payment sector have also likely played a role in the stock’s crash.
But the company’s overall, longer-term outlook remains very bright, making the shares extremely attractive at their current levels.
The Results Were Not Bad
PaySafe’s overall Q3 top line came in slightly below analysts’ average estimate and fell 1% year-over-year. However, excluding businesses that the company sold last year, its sales increased 13% YOY, while its EBITDA, excluding certain items, jumped 16% YOY.
Further, although its Q4 net loss came in at $147.2 million, that includes a noncash impairment charge involving intangible assets. In fact, its Q3 net cash from operating activities jumped 37% YOY to $51.6 million, and its free cash flow surged to $70.2 million, up from $58.8 million during the same period a year earlier.
Paysafe cut its 2021 sales guidance to $1.47 billion-$1.48 billion, versus its previous outlook of $1.53 billion-$1.55 billion. But the company still expects adjusted EBITDA of $90 million- $100 million and $425 million-$435 million for Q4 and all of 2021, respectively.
Making Progress and Addressing Digital Wallet Issues
In Q3, the company continued to make meaningful progress in multiple areas. For example, the revenue of its North American iGaming unit jumped over 70% YOY last quarter, and it now operates in 19 of the 21 American states in which gambling has been legalized. And more top iGaming operators continue to adopt its payment system.
Meanwhile, the sales of Paysafe’s Integrated Processing unit grew by high-teen percentage levels for the first three quarters of 2021. Its direct marketing business, which had been problematic earlier in the year, is recovering, showing growth in Q4 versus Q3 and “on track…to return to growth,” CEO Philip McHugh reported.
Finally, Paysafe is making progress on expanding the use of its Skrill digital wallet in the U.S. Speaking of digital wallets, Paysafe’s digital wallet business struggled in Q3 and the first half of Q4. McHugh blamed the business’ issues primarily on regulatory changes in Europe and pricing fluctuations.
The company, however, is taking multiple steps to improve the unit. It hired Chirag Patel, who has a great deal of experience leading payment businesses, to head its digital wallets unit
Paysafe is working to simplify its digital wallets and make elements of them more affordable. It’s also lowering the unit’s labor costs and raising the prices of some features. Finally, the company is expanding a number of its partnerships in the space and looking to enhance the use of its digital wallet in the North American iGaming and crypto markets.
McHugh indicated, however, that he does not expect the unit to begin rapidly growing until 2023.
Bottom Line
Annualizing the company’s Q3 free cash flow of $70.2 million results in a total of roughly $281 million. The company’s enterprise value is $4.71 billion, according to Seeking Alpha. Based on those metrics, Paysafe is trading at an enterprise value-free cash flow ratio of 16 times — and that’s actually a very attractive valuation.
As another InvestorPlace columnist, Ian Bezek, noted in an article on PSFE stock last month, the entire payments sector has been weak lately. Worries about new platforms that will take market share away from more traditional payments systems are pulling the sector down, he asserted. But he noted that, ” The actual evidence that alternative technologies are taking much market share remains limited, however.”
And Bezek correctly pointed out that Paysafe, with its digital wallets and partnerships with online gaming and crypto operators, is very levered to the newer payment systems.
Since Paysafe does not expect its digital wallets to grow quickly until 2023, the shares may not rebound tremendously until then. But given the company’s strong management team, I think that it will turn itself around by then. That positive outlook, along with the company’s other attractive attributes and its low valuation, makes PSFE stock a buy for long-term investors.
On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Larry Ramer has conducted research and written articles on U.S. stocks for 14 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, solar stocks, and Snap. You can reach him on StockTwits at @larryramer.
